Research Results – Signal Power over Time

How long is a sell signal valid for? Will excess return come in the first week or month after the signal was triggered, or will such stocks still outperform benchmark half a year later?

Figure 1: Medium long term signals, price development the following year. Average price development for stocks in rising and falling trends in Investtech’s medium long term technical charts.
 

The table shows average return per day after signals for stocks that on day 0 (the day signal was triggered) were in rising and falling trends in Investtech’s medium long term technical charts. The figures are estimated as a weighted average of the four Nordic stock exchanges shown in the charts above.

We focus on rising trends and buy signals. The table shows that return from day -1 to day 0, i.e. the day the stock entered a rising trend*, was 0.39 per cent. In other words, there was a big rise that day, compared to average changes for the stock. The day after the signal, the stock rose by an average of 0.06 per cent. Until 35 days after the signal, the stocks rose by 0.08 per cent per day on average. After that, they rose by 0.07 per cent per day until day 66, for approximately 3 months, and then by 0.06 per cent per day until day 200.

The table and the charts show that stocks rise a little more in the first one to two months after signal, but that the rise continues for as much as a year after signal. Compared to benchmark, stocks with buy signals have given excess return for about six months.

Sell signals have given negative excess return vs. benchmark for the entire 12 month period for which we have statistics. Daily negative excess return is greater the first month, but high for all of the 200 days after signal.

We have studied predictive power over time following signals from stocks in rising trends in the medium long term. A visual inspection of return charts for other signals and from charts on other time perspectives show similar results. An overall conclusion can be that signals appear to have good predictive power the first three to six months.

*Including both the very first day a stock enters a rising trend, but also new signals after 21 days or more, if the stock remains in the same rising trend. Stocks that exited and re-entered the trend, required at least a 21 day break for a new buy signal to be registered for the same stock.